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How To Start a Property Management Company From Scratch
You've decided to start a property management company but don't know where to begin.
You wonder: what legal entity is best for my business, what licenses I need, whether I need to specialize in a particular niche, how to handle the legal side, how to organize a functional team, what insurance I need to protect my business, how to effectively serve my future clients.
Answering these and some other questions will set you up for a good start in property management.
Before committing to start your own company, understand that you're signing up for a business built on relationships. To get your company off the ground, you'll need to clarify your goals and develop a solid marketing plan.
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Setting Up Your Property Management Business
Starting a property management company can be as challenging or as simple as you make it. It helps to get informed about the critical steps and strategies and to learn from those who have "been there and done that."
Property management is a high-demand business that has grown consistently over the years and continues to do so. The rental market remains stable even in economic conditions that can wipe out many other businesses. By managing other people's properties on their behalf, you can run your own business and create a work-life balance tailored to your needs.
We'll discuss the concrete steps you can take, the requirements you must fulfill to become a full-fledged property manager, and the business strategies that will help your company thrive (even in a very competitive market).
Step 1: Define Your Goal and Your Property Management Niche
While some people prefer to figure things out on the go, your business's success may depend on how well you set your specific goal. In other words, doing what most property management companies do could be a shortcut. Still, the danger is to fail to position yourself in the local market and differentiate from competitors.
One way to claim your spot is by choosing a niche. You find your niche by asking yourself what type of properties you feel most comfortable managing. We usually differentiate a few types.
Single-home Residential Management
Single-family properties are undoubtedly a very popular model. This model works very well when you work with individual owners who own a property in good condition so you can attract quality tenants.
The responsibilities of a single-family property manager are:
- Finding tenants and screening them.
- Setting and collecting rent, tenant management.
- Handling maintenance and repairs.
- Ensuring lease compliance.
Still, finding new tenants and finding quality tenants is a challenge. First, you have to minimize the time the property is vacant, and second, you will be the one to deal with the eviction process of a bad tenant.
Determining a percentage to charge for your property management fee for single-family properties is straightforward.
Multi-family Residential Management
With this option, you'll manage multi-unit buildings, from duplexes to large apartment complexes. Multi-family management is somewhat more complex. You'd need to:
- Manage multiple leases, tenants, and maintenance requests simultaneously.
- Coordinate common areas like hallways, gyms, or pools.
- Address shared utilities and amenities.
- Collect rent from numerous tenants.
Nonetheless, if you choose this path, double down on efficiency, as high tenant turnover and frequent leasing are common. Maintenance of shared facilities may require specialized vendors. Again, it depends on the condition of the 10-plex or 20-unit building and what kind of tenants live there.
Lastly, pricing works differently because you can't charge as much for one unit as you would for a single-family home. You'd need to double-check and calculate what to charge in order to stay profitable.
Commercial Management
You can decide to work with businesses instead of tenants. You will be managing retail, office spaces, or industrial properties for business purposes. Some of the responsibilities of a property manager are:
- Negotiating and managing complex leases.
- Handling long-term contracts with businesses.
- Maintaining property value for investors or owners.
- Ensuring compliance with zoning laws and safety standards.
Commercial leases are typically longer and more intricate. Equip yourself with knowledge and legal and financial expertise, especially commercial real estate laws and tax implications. Downtime or delays in resolving problems like HVAC repairs or internet outages can significantly affect tenants' operations, so you and your vendors must be prompt to react.
Short-term Rental Management
If you want to manage Airbnb properties rented out in the short term to host tourists and other short-term guests. Your main responsibilities will be:
- Marketing properties on short-term rental platforms.
- Managing frequent guest turnover.
- Hiring and supervising cleaners and maintaining the property between stays.
- Ensuring compliance with local short-term rental regulations.
If you are hosting guests, prioritize excellent guest experience and responsiveness to guest inquiries (having iGMS in your tech stack will make things easier for you).
You must stay updated on local rules and possible restrictions on STR and understand dynamic pricing practices. STR property managers typically charge higher fees than residential property managers , between 10% and 30%.
HOA Communities Management
As an HOA manager, you'll oversee homeowners associations (HOAs) and their shared community spaces. You have to:
- Enforce HOA rules and regulations.
- Collect dues and manage community budgets.
- Coordinate landscaping, security, and shared amenities maintenance.
- Mediate disputes between homeowners and address compliance issues.
The challenge is balancing the interests of multiple homeowners. You'll also be dealing with sensitive issues like non-compliance with HOA rules, which involve situations where homeowners or residents violate established community guidelines.
Don't Skip a Market Analysis
Before you dive in, research your competitors thoroughly. Identify the property management companies in your local area, understand how they operate, and learn about their pricing. Consider giving them a call or even visiting their offices to gain firsthand insights.
You can't differentiate your service if you don't understand what everyone else in the real estate market is doing.
Step 2: Licenses and Legal Requirements
Most states in the US have strict requirements for running a property management company. The bottom line is that you'll need to research the specific rules and regulations in your state or country.
In most US states, you'll need a real estate broker's license to operate a property management company—even if you're not planning to sell properties. The only exception is if you are going to manage your own properties. Typically, you'll either need to obtain your own broker's license or work under a licensed broker.
Why? Property management involves real estate transactions like collecting rent, leasing properties and negotiating leases, all of which are legally considered real estate services. You might handle daily tasks and maintenance without a special license (like a co-host would), but when it comes to the transactional and legal aspects of the business, your hands are tied without a license.
States That Require a Broker's License
Most U.S. states require a real estate broker's license, so listing all of them would be too lengthy. Instead, let’s focus on some of the most populated states.
If you run a California property management company, you need a broker's license issued by the California Department of Real Estate (DRE) to get started. To qualify, you must complete 135 hours of DRE-approved pre-licensing courses and pass the corresponding exam. Like in every other state, you must be at least 18 years old, a U.S. citizen, and hold a high school diploma. California also requires at least two years of real estate sales experience under a licensed broker. A certified property manager license is optional but not required.
In Florida, the requirements are quite similar. You need a broker's license to start a property management company unless you manage your own property or are directly employed by a property owner. To obtain the license, you must complete a pre-licensing course approved by the Florida Department of Business and Professional Regulation (DBPR) and pass the broker exam.
States That Don't Require a Broker's Licence
In some states, you can get away without having a broker-of-record license. According to Yardi Breeze, those countries are Idaho, Kansas, Maine, Maryland, Massachusetts, and Vermont.
For example, in Idaho, property management companies are not required to possess a real estate license to manage a property. Only if they plan to sell properties do they need to hold a real estate license.
Others require only a property management license: the District of Columbia, Montana, South Carolina, South Dakota, and Oregon.
In Oregon, for example, based on the Oregon Real Estate Agency website, you need a specific Property Manager License to start a property management company in Oregon. To get one, you need to complete a 60-hour Property Manager pre-license course from an Agency-approved real estate school and pass the exam. Also, you can only hold one real estate license at a time (broker, principal broker, or property manager.)
Step 3: The Legal Business Entity of Your Own Property Management Company
When launching your property management business, it is important to select the right legal business structure. Most property managers choose between two business entities: a Limited Liability Company (sometimes called a limited liability corporation) or an S-corp.
An LLC provides significant flexibility, with profits "passing through" directly to you as the business owner. This means the company's income is taxed only at your personal income tax level.
S-Corps allow tax obligations to pass through to shareholders. While similar to LLCs in tax treatment, S-Corps can offer additional payroll tax advantages and might provide more credibility with potential clients and investors.
While technically possible, C-corps are not the best recommendation for property management businesses due to the common issue of "double taxation."
Step 4: Open a Real Estate Trust Account in Your Local Bank
Your property management company must have a separate business bank account from your personal one. One more important point to note.
You have to ask your local bank to open a real estate trust account for you. A trust account securely holds funds that belong to clients, property owners, and tenants. It's not just any trust account, it must be a real estate trust account. Tenant rents and security deposits are deposited in the trust account to ensure transparency (and to keep it separate from your business account).
Step 5. Write Up a Property Management Business Plan
A solid business plan provides a clear roadmap for your business. It typically includes:
- The Executive Summary
- Value Proposition
- Management Structure
- Operations Plan
- Financial Plan
- Customer analysis
- Competition Analysis
- Marketing Strategy
Step 6: List All Your Property Management Services
It's time to map out exactly what you'll do for your clients and how much you'll charge. Think of this as creating your service bundle.
- Marketing property, finding tenants and tenant screening
- Lease preparation, signing, and renewals
- Collecting rent payments
- Managing security deposits and other tenant funds
- Handling late payments, rent increases, and eviction notices
- Scheduling regular property inspections and maintenance
- Handling emergency repairs and upkeep
- Managing vendor relationships
- Coordinating preventative maintenance
- Ensuring compliance with local, state, and federal laws
- Managing eviction processes and court appearances
- Ensuring proper property insurance coverage
Or/and
- Creating and optimizing listings on short-term rental platforms
- Writing compelling descriptions and taking professional photos
- Managing dynamic pricing strategies
- Handling check-ins/check-outs and guest communication
- Coordinating cleaning and restocking of supplies etc.
Step 7: Choose Your Pricing Structure
What will you charge your clients?
This can be a tricky question for newbies. When your main goal is to break into the market, the logical choice might seem to be competing on price.
But is that really the best choice?
You can undercharge at first, but once you gain some traction, you'll need to think about running a profitable business and adjust your rates to stay sustainable. Otherwise, you could get stuck in a cycle of attracting the wrong clients and managing low-performing properties.
You have two pricing structures to choose from:
Flat Fee Structure
With this model, you charge a flat monthly fee for your services. This can be a good way for newcomers to attract clients. However, flat fees have one major downside: to stay profitable and keep up with inflation, you'll need to raise your fees periodically, perhaps once a year. Each time, you'll have to explain the increase and justify the new rate to your clients.
Percentage Based Fees
This pricing model is clear and straightforward. You take a percentage off of the rental income. This is how property managers typically charge for their services. The ongoing management fee goes from 6% to around 30% (but you can find outliers). The percentage is higher for full-service short-term rental management.
On top of that, some professionals charge property owners extra fees for each tenant, including a one-time leasing fee, lease renewal fee, or eviction fee.
Step 8: Set Up a Website/Office
Having a website is a way to convey professionalism and clarify your offerings, especially if you don't have a brick-and-mortar office.
Do you need these things to run a successful property management company? It depends on your goals, but a website is a no-brainer since much of your work will involve marketing your services and attracting leads.
Having an office space depends on your objectives. It's preferred if you want to run a boutique property management company to be a specialized, client-focused service provider that prioritizes personalized experiences.
Step 9: Get Property Management Insurance
Choosing insurance coverage isn't something to take lightly. As a property manager, you need specialized insurance that protects yourself, property owners, tenants, and rental properties.
Professional liability insurance (also known as errors and omissions insurance) is especially important. This type of coverage protects you from claims of negligence, professional errors, or omissions in your property management services.
Certain types of rental properties require dedicated insurance plans. For instance, short-term rentals are covered by STR insurance. We also recommend umbrella insurance, which provides an extra layer of financial protection that kicks in when your other policies are maxed out.
Step 10: Obtain Other Legal Documents
To operate legally and efficiently, ensure you have the required documents:
Articles of Incorporation or Organization
These establish your business as a separate legal entity and outline its structure and management. File them with your state’s Secretary of State office. Consider consulting a real estate attorney to help you out.
Obtain a Federal Tax Identification Number (TIN)
This nine-digit IRS-issued number is essential for taxes, banking, and hiring. Apply online through the IRS website.
Register with State Agencies
To stay compliant, check with your state’s business registration office for required forms and registrations.
Step 11: Create a Property Management Contract
A property management agreement should definitely be handled by a local real estate lawyer. Downloading a template alone won't cut it. You need a lawyer who understands state laws and the scope of your agreement.
Most contracts include:
- Identification of Parties Involved
- Property Description
- Term of Agreement (The duration of the agreement, renewal options or termination clauses)
- Scope of Services
- Management Fees and Compensation
- Work Hours and Vacation Time
- Termination Procedures
- Insurance and Liability (Insurance requirements for both parties)
- Maintenance and Repairs
- Accounting and Reporting
- Conflict Resolution
- Additional Provisions
Handling Finances
Scaling quickly is crucial to running a profitable business. Managing numerous rental properties means you’ll soon outgrow Excel spreadsheets.
Accounting
Be in control of your finances with accounting software. This software records all transactions with tenants, landlords, vendors, etc. It’s not just about collecting rent (or gathering short-term rental income) but also efficiently managing numerous expenses such as paying vendors, and utilities, and charging your management fees.
It automates processes like invoicing, tax calculations, and reporting. You can use general accounting software like QuickBooks or opt for solutions tailored to real estate and property management needs.
Make Sure Accounting Software and Bank Account are Connected
When you start using accounting software, you want to connect it with your business bank account at your local bank. This integration allows for seamless payment reconciliation and helps track cash flow in real time. Otherwise, transactions won't be accurately recorded. It should also be connected to a trust account, holding security deposits and money that belongs to tenants and property owners.
Have Property Management Lease Agreement Reviewed By a Local State Attorney
A local state attorney must review lease agreements that you'll sign on behalf of the landlord with tenants. By doing this, you ensure compliance with all applicable laws. Unfortunately, this isn't a "set it and forget it" situation. You'll need to review your lease agreements at least once a year, as local, state, and federal laws change, and your scope of services may evolve over time.
Team Building and Daily Management
Real estate management requires an organized system and hiring the right people. Managing multiple properties demands sharp project management skills while focusing on marketing and sales, especially during the initial phase.
Over time, you'll determine how many property managers to hire and decide on additional staff: administrators, leasing agents, field managers, maintenance personnel, and back-office roles responsible for accounting, marketing, and sales.
You'll also establish contracts with vendors like plumbers and electricians to handle property maintenance and repairs or a contract with an accountant.
As a rule of thumb, you should hire roles that complement your strengths. For instance, if you're a people person who's passionate about sales and enjoys engaging with potential leads, you'll want to hire professionals to manage the operational aspects of the business.
Organizing Technology
We already discussed how accounting software can serve you. Additionally, you will find property management software (PMS) useful to have in your tech stack.
PMS supports your property management operations daily. For example, PMS can have a tenant portal, allowing you to collect rent automatically and tenants to submit maintenance requests. A vast portion of duties will be digitalized, including tenant screening and background checks, lease management and digital lease signing, financial reports, work order creation, and tracking, assigning tasks to vendors, and paying them.
How do you choose the right PMS solution?
First, there is a considerable choice of tools on the market, but they don't all serve the same purpose. If your focus is short-term rentals, you need a solution that includes functionalities like a channel manager to automatically update bookings across platforms, a unified inbox, and automated messaging, as communication with numerous guests is your priority. Additionally, task management for cleaners and other staff is essential to handle guest turnover seamlessly.
In that case, a solution like iGMS will allow you to stay on top of your daily management without spending much time on repetitive tasks.
Marketing Strategy
Now that you understand the basics of starting a property management company, it's time to plan how to scale your portfolio from zero to 50, 70, 80, 100 doors, or more. Marketing activities for branding and promoting your business are just as important as being a solid property manager.
Don't be surprised if, especially in the beginning, you spend more time on marketing than you might expect. In this sense, the property management industry is no different from many other businesses.
These things you can do to bring in more clients:
Optimize your website for local SEO search so people in your area can find you.
Do content marketing, such as blog posts, to establish yourself as an expert and improve your visibility in search engines.
Start posting on social media to build a following and bring in leads.
Attend local business events.
Ask satisfied clients to leave you a review on review websites so new people can find you.
Encourage referrals from other real estate professional contacts like brokers and real estate investors.
Try out a paid search.
Networking and Building Relationships
All marketing channels can work for you, but networking and building relationships are the bread and butter of your business. In the real estate industry, professionals are looking to build up a network of people who can trust and who can eventually refer them to clients.
It means parenting with local realtors, real estate investors, and real estate lawyers, building trust, and also incentivizing them to refer clients your way.
Sometimes, even local vendors like plumbers who work in the neighborhood come across landlords seeking to rent out their properties.
Thinking about starting a short-term property management business? Check out iGMS, a PMS designed from the ground up for Airbnb-type properties. It handles daily operations, replacing daunting manual tasks with an efficient automated system.
